Do you really understand your pension?
For those of you lucky enough to have a workplace pension plan, understanding how it works is an important first step in planning for your retirement.
Whether it is the more basic Defined Contribution pension or the more complex Defined Benefit pension, understanding how to maximize the benefits and choose the best options available are important steps on your road to financial independence.
Defined benefit: Typically formula based where retiree receives a guaranteed income amount at retirement.
✔ Is there an annual pension factor reduction on your pension?
✔ Is your pension formula based on the average of your last 5 years or is it based on an average of your 5 last best years?
✔ Is your plan indexed for cost of living increase?
✔ Do you understand the survivor benefit on your pension?
✔ Do you have a guarantee period on your pension?
✔ What happens if you retire early? Are there actuarial penalties? (Magic 80)
Defined Contribution: Typically this is a plan where both the employer and employee pay into. (Often it's a employer match program). There is no guaranteed income at retirement.
✔ What is the maximum % that can be matched?
✔ Do you have investment options to select for these funds.
✔ Do you understand how the income draw down works? (LIF, PRIF, life annuity)
The answers to these questions need to be factored in to the context of your overall plan.
In this video, Shaun Humphries B. Admin, CFP, Senior Financial Planning Advisor of Humphries Wealth Group of Assante Capital Management Ltd, Shaun reviews both Defined Benefit (DB) and Defined Contribution (DC) pension plans. How they work and the pros and cons of each type of plan.
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